Helene Fourie suggests you come clean now and take advantage of Sars's amnesty.

The South African Revenue Services (Sars) is poised to crack down on several "creative accounting" mechanisms frequently employed by private company executives to reduce their tax bill.

The charging of admin fees to shift profit into a loss-making company has been around a long time, but is set to become a focal point of tax audits next year for companies that fail to take advantage of a year's grace. Sars is looking at ways to make up the shortfall in tax revenue, and companies treading a fine line in this regard may expect Sars to scrutinise them far more intensely next year than in the past. The consequences of being caught out could be painful.

There is a common acknowledgement that some company executives have been shifting profit from profitable businesses to unprofitable ones, to avoid and or postpone when tax will be charged - but this is not a smart thing to do. While they may have saved the immediate tax, the tax file never closes on companies and where uncovered, Sars can levy not only the original tax, but a penalty of 200% of the tax, with additional adverse implications in relation to the under declaration of VAT between connected parties.

Sars has declared an amnesty for companies to declare previous and current instances of shifting profits in this manner, which Fourie recommends they take advantage of.

This may slip through the audit process because the role of the auditor is to check into only those figures above a materiality level, and admin fees being typically fairly small, would generally fall below their materiality figure. However, aggregated over the years and combined with the 200% levy, these could now become significant indeed to the company.

Executives may not have seen it as a problem. They may see it as simply an internal transaction affecting no external parties, but it is a real outflow to Sars. They have therefore announced their intention to specifically focus on these charges this year, and to clamp down. That is why they've offered a voluntary disclosure period (amnesty) to give companies the chance to first come clean, pay the tax and avoid the penalty.

Sars is widely respected for having changed the tax culture of South Africa from one of tax avoidance to widespread tax compliance, but Fourie says the task is only half complete. The culture has changed among larger, and especially listed companies, but full compliance is less common in private companies "where tax avoidance is still largely the culture".

The voluntary disclosure period is for one year starting on November 1 2010, and will apply in respect of defaults committed prior to 17 February, 2010. Following this window, they can expect Sars to be both unrelenting and unforgiving for those caught out.

Furthermore, Sars is currently employing more qualified people, so will have the capacity to challenge companies. Worse, if the matter goes to court the onus of proof is on the corporate taxpayer. Companies legitimately charging subsidiaries admin fees can also expect to be minutely scrutinized, and to these Fourie says in future they must ensure there is substance to it "to avoid potential future cash flow losses to Sars".

*Helene Fourie is corporate tax associate in BDO's Tax Department

Disclaimer: Please note that this article is at least 12 months old. Any information herein was accurate when published on 7 September 2010

BDO Southern African Co-ordination (Pty) Ltd, a South African company, is a member of BDO International Limited, a UK company limited by guarantee. BDO is the brand name for the BDO International network and for each of the BDO Member Firms.